Has Brussels got the market covered?
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Has Brussels got the market covered?

The European Union is introducing the first uniform covered bond legislation. The long-term effects could be beneficial, but some issuers still point to discrepancies between countries that could stifle the development of a cross-border European mortgage funding market. Mark Brown reports.

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With no fanfare, no speeches, no toasts or celebratory dinners, the European Union has transformed the covered bond world.

On September 28, a plenary vote in the European Parliament led to the adoption of the Capital Requirements Directive (CRD), the EU’s draft legislation that will implement Basle II. At the time of writing, approval by the EcoFin Council of economics and finance ministers was expected imminently.

“This is the first time there’s been a European-wide piece of legislation for covered bonds,” says Paul O’Connor, head of prudential supervision and risk at the Irish Bankers Federation.

You could be forgiven for not having tracked this in detail. The CRD is a meaty directive. By the time of the plenary vote, MEPs had tabled and voted on some 887 amendments to it – a record. But its treatment of covered bonds did prompt a significant debate. “Initially covered bonds was an issue in the wings, but they were the second-to-last issue to be agreed,” says O’Connor.

The CRD defines the eligibility criteria of different securities for preferential risk weighting. “It doesn’t tell you what a covered bond is,” says O’Connor.

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